Mortgage Market To Undergo Restructuring?

The market for mortgage backed securities (bonds) are due to be re-structured in the not-so-distant future. As the mortgage and real estate markets have largely healed since the crash in 2009, the inevitability of change may bring about an interesting set of circumstances. Some are predicting the restructuring or replacement of Fannie and Freddie will increase rates and the hurt the affordability of real estate.

Fannie Mae and Freddie Mac were created decades ago to expand the liquidity of the mortgage markets and make borrowing more accessible. The unintended result of their growth has been artificially low interest rates due to the government’s implied guarantee to investors who buy mortgage bonds.

Last week the federal Senate banking committee reviewed a bipartisan bill that seeks to replace Fannie and Freddie with a more privatized system. Under the plan, private enterprises could issue mortgage backed securities and related products--and purchase federal insurance. Both Fannie and Freddie say that such a move would result in an increase in mortgage rates due to the broader design of the new system and the capital requirements.

The reforms in the Senate bill would be targeted at avoiding future government bailouts . But any reform that is suggested pursuant to helping a mortgage agency avoid a bailout could lead to a good chance of mortgage rates increasing.
The move would require any potential Fannie or Freddie replacement to hold more capital--which may in turn increase the cost of borrowing. The senate bill would require successors to maintain a 10% capital cushion which some economists say is more than double that which Fannie and Freddie were required to withstand the 2008 crisis.

Several financial experts have weighed in with their own forecasts for potential rate increases. According to Moody’s Mark Zandi, interest rates may increase by half a per cent and Fannie professed that rates could jump as much as .25 per cent across all products.

Stay tuned.